Tax Tips for Your Business

It’s October now, which means roughly seven months until tax season. Though we’re closer to last year’s tax day than 2014’s, it still looms ominously ahead, the scary IRS an undeniable presence for business owners everywhere. To make sure that you’re preparing (even now) for big, bad tax day, take these suggestions from Jason Hartman and relax until springtime.

Keep Good Records

Taxes require a lot of paperwork, and small business owners often get frustrated and overwhelmed by the sheer amount. But remember, an IRS audit is more likely if they suspect your records are less than great. For every three of five years, you should show a profit—a lack of this could show faulty record keeping.

Likely, you’ll not be required (except in the case of an audit) to show all of your records. But they’ll help you keep organized and provide backup, should you ever need it.

Type of Business

The IRS categorizes businesses based on whether or not they show a profit, which is often an indicator of the seriousness of a business. Hobby businesses don’t show profit and often don’t qualify for the same tax benefits as for-profit businesses. If you’re a new business, you’ll probably be slower to show a profit, but you can still ask that the IRS recognize you as an actual business. First, be professional in your business dealings (and keep record of them). Next, record all losses and profit, keep a current financial statement, and be (or employ) experts in your field.

If you are running a hobby business (one that makes little profit and is hobby-focused), continue to employ small business best practices—but also document what qualifies it as a hobby business, such as your focus, interest in it, and any profit you might make.

Your Accounts

A business account should always, no matter how complicated, be kept separately from your personal accounts. Whenever you pay taxes, you’ll be asked to divulge a wealth of financial information that is separate from your individual accounts. In addition to protecting your personal finances, separate accounts will not red flag the IRS who would then audit your business.

By completing these few simple steps, you’ll reduce the likelihood of an IRS audit—a painful, time-consuming process for all involved. You’ll also find that all of your business dealings and correspondence becomes more organized which often results in an increased profit. (http://www.flickr.com/photos/enigmachck/2284195948/)